4.50 pm

Lord Howe of Aberavon: My Lords, I feel rather disturbed by the fact that people say to me from time to time that, as a former Chancellor of the Exchequer, I must have the answers to all these difficult questions. It is particularly disturbing when I am in the company of two of my successors, both young striplings for whom the memories are still quite recent. It is worth reminding your Lordships that I was first exposed to these problems 35 years ago when I was a junior member of the Heath Cabinet as Minister for Consumer Affairs. Every two or three weeks I would answer a Private Notice Question about one or other secondary bank that had gone down the week before in what I call the Keyser Ullman era. It is now 25 years since my last Budget and since I last presided over the IMF Interim Committee.

However, much about todays crisis is unlike what we faced then. One big difference is that, in those years, inflation was one of the most overwhelming and dominant issues we had to face. I was criticised widely for a Budget of rash extravagance in taxation increases which enabled me to reduce the borrowing rate from 14 to 12 per cent, but the late Edmund Dell subsequently said in a book that I was not tough enough because within three months, a week or two before the Tory party conference, interest rates had to go back up again to 16 per cent. But all that is in the past. In todays circumstances, I endorse what has been said by a number of noble Lords in respect of the case for reducing interest rates as one of the components that is essential to the future. We cannot neglect inflationone has to have it always in mindbut it is the first big difference.

The second big difference is the way in which tales like Keyser Ullman seem like chickenfeed alongside the widespread collapse of confidence in banks and

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financial institutions generally, an issue on which many noble Lords have already spoken. That is something in which the two Anglo-Saxon major economies have led the way, if that is not too kind a way of putting it. Other noble Lords have explained the reasons for the extent to which sophisticated derivatives have been used for purposes that managers hardly understood and, above all, there has been inadequate oversight of the banking industry and associated institutions, certainly in this country.

This is astonishing in retrospect because we had a pattern for oversight of the banks in the old days which appeared to work. There was an osmotic contact between the Bank of England and the financial industries generally. I found that when the Board of Tradethe Department of Trade and Industrywas unable to tell me anything about the banks that were closing down, although it was not long before that they had been given a Section 123 certificate of their legitimacy, the Bank of England always knew enough about it to get it right or nearly right.

What has happened since then in various stages is that, first, there was the establishment by my noble friend Lord Lawson of the Board of Banking Supervision, and then its disappearance. Alongside that, there was the abolition of 10 separate institutions for the oversight of the financial industries and their merger into one body, the FSA; and the disappearance of the Building Societies Commission, a body with which the industry was familiar and whose oversight was constant by people who knew what they were talking about. This was exemplified and described in an article written by Ian Hay Davison in the Spectator on 16 April showing how he was able, as chairman of a newly shaped board, to deal with the collapse of the National Mortgage Bank in 1992. In those days, that was done by quick, clean-cut and confidential procedures. Within little more than a week, the Bank of England had assembled a consortium of 26 banks, with substantial sums of money to back them up, and old board members were replaced. Within a week or two of the news of the disaster, the remedies were in place to handle it properly and they came to the right effect. I shall not go into details because others have done so already, but there has to be a huge change to restore a far more effective surveillance of these industries.

The other feature has been the way in which, as many have already pointed out notwithstanding the bold proclamations of the Prime Minister, as he now is, in respect of prudence and so onprudence disappeared from the agenda of this Government five or six years ago; Budgets have been in deficit since then. Likewise, the 40 per cent ceiling on the scale of borrowing is being swept aside as we speak, and there is great reason to be fearful if that continues as it now is. In respect of that, I align myself with what others have said: we have to install a sensible and effective mechanism for the oversight of folly and worse than folly in an industry as important as the banks.

We have to maintain the discipline necessary in respect of public spending. Figures produced by the Institute of Fiscal Studies, quoted by my noble friend Lord Ryder of Wensum in the debate in this House on 18 July, showed that between 1979 and 1997 the public

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sector took 30 per cent of growing economic resources and the private sector 70 per cent, but that from 1997 to today that ratio has shifted dramatically and the state now takes 46 per cent and the private sector a much smaller share of 54 per cent. That is the long-running fundamental malaise on which, aside from the incompetence that I have already referred to, many of my noble friends have concentrated their attention. My noble friend Lady Noakes presented the case as comprehensively as we could have wished to have seen.

That is why one can have so little confidence in the record and likely performance of this Government. It is not a bad thing that they have at least begun to recognise the need for some effective action, but do not let us believe that we will be anywhere near out of the woods for many months to come.

5.01 pm

Lord Powell of Bayswater: My Lords, I draw attention to my declaration of interests in the register. I congratulate the Minister on his appointment; we served together on a board in the 1990s, and I know him to be a robust and resilient character who will not be the slightest bit dismayed by this afternoons quite modest parliamentary assault.

Most of the speakers so far have focused on the impact on the UK economy. I want to range a bit more widely and look at the broader international impact. None of us yet knows how deep the economic downturn is going to be or how long it will last. You sometimes hear it said that it is just another recession of the sort we are used to; it will last four or five quarters and then we will be recovering by the last quarter of 2009 or early 2010. That is surely too optimistic. Almost anyone in business will tell you that it feels worse than that, and it is going to get worse still. At the other end of the spectrum, some people refer to it as a once-in-a-century event. President Bush, talking about the US economy, said in his inimitable style:

This sucker could go down

which can be more politely translated as, We may be heading for a slump.

Is it going to be that bad? It should not be, given that we now have more sophisticated policy instruments than in the past and much better international co-operation. However, we do not yet have a clear view of the scale of the overhang of fiendishly complex credit derivatives, credit default swaps and other instruments that still have to be unwound. All that one can really say is that, first, the damage to our western economies is already substantial and it is going to get worse before it gets better. Secondly, it is affecting not only the UK, the United States and Europe but just about everywhere. I have visited seven countries in the past two weeks, ranging from Brazil to China and the US, and everywhere I have found pessimism about the prospects. The idea of decoupling simply does not work. Thirdly, we are still at an early stage of the crisis. It is far too soon for any self-congratulation about saving the world financial system.

In fairness, we must allow the measures already taken time to work through. Action to recapitalise the banks has gone some way to stabilising the situation

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but it is probably not enough, and more government money will be needed as the crisis continues to unfold. Normal lending has not resumed; companies, particularly small onesI agree very much with the noble Lord, Lord Bilimoriaare still finding it extremely hard to obtain credit. The impact on insurance companies and on credit card issuers has yet to be fully felt. As poor company results come in for the fourth quarter of this year and beyond, they will add to the difficulties, leading to mounting job losses and bankruptcies. Beyond that, we have to expect that some countries in eastern Europe, in Latin America and possibly even closer to home will buckle and renege on their debts. That is the gloomy scenario that, in all probability, still lies ahead of us.

I shall reflect for a moment on some of the possible wider implications of the crisis and how we should respond. One is the issue of direct government involvement in business. It is fashionable at the momentnot without justification, in some areas of banking and financeto talk of the excesses of the free-market system. Clearly there is going to be a backlash after the crash, and it will probably go too far; in fact, that always happens. But before people get too hung up on the evils of the free market, it is worth recalling the disasters inflicted on our economies and our well-being in the past by nationalisation, public ownership and government interference in business. I really cannot imagine that anyone wants to go back to that. Yet there are increasing demands, in mainland Europe especially, for more state intervention and more subsidies. I hope very much that the United Kingdom will fight a strong rearguard action in Brussels to ensure that the European Unions competition laws remain firm.

Similarly, we need to make sure that increased regulation does not go beyond the prudent to the punitive and simply increase the cost of capital, thus hampering rather than facilitating the recovery of the economy. While it is good news that Governments are co-operating internationally in response to the crisis, we should not confuse process with substance. You can reach bad solutions multilaterally just as easy as nationally. We do not need vast new bureaucracies for regulation, but simple principles, adopted internationally, and applied through clear rules at national level.

Another risk is that the present crisis will give globalisation a bad name and set countries on course to erect new barriers to trade and investment. Shamefully, one is hearing echoes of this in the US presidential election campaign, particularly in relation to trade with China, but also in parts of mainland Europe. Beggar my neighbour policies only worsened and prolonged the great depression of the 1930s. We have to avoid that. Trade is the way out of recession, and although the climate is not exactly propitious, an attempt even now to breathe life back into the Doha round is worth considering.

Then there is the impact on the worlds poorer countries, which is only just beginning to be felt. If foreign investment slows or is withdrawn and export markets decline or even close, the considerable progress made in recent years in lifting millions out of poverty

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will be halted or reversed. The consequences of that are stark in themselves but also as breeders of turbulence, instability and extremismand, at worst, fresh conflicts.

I have a specific point on China, which I visit frequently. China showed commendable steadiness in the Asian economic crisis in 1997, refusing to engage in competitive devaluation. Like every other country, it is feeling the effects of the spreading recession, and they will be severe for a country which still ranks only 121st in the world in per capita GNP. But because of prudent financial policies, China has the means to expand domestic consumption and invest even more in infrastructure; it has also announced measures to increase rural incomes. These measures should enable it to maintain growth at a tolerable level. It would be unrealistic to expect China to be the locomotive for global recovery, but it will be among the first to recover, and that will be positive for the rest of us.

There are many other possible consequences, including widespread disillusion with our western model of society in the eyes of much of the world as a result of the wanton damage caused by the convulsions in our financial system. At the least, our failures may be quoted as an excuse for various sorts of authoritarianism and government control of economies.

Our Governments are bound to be preoccupied with firefighting the immediate problems of keeping our economies afloat. Doing that effectively is crucial to minimising and avoiding the wider dangers and salvaging the reputation of our system. We must demonstrate that we can repair the damage without jettisoning the fundamentals of our free market system.

5.08 pm

Baroness Shephard of Northwold: My Lords, I should like, in my turn, to welcome the Minister to the Dispatch Box. I feel sure that, coming to the House with his background, he will privately agree that this debate is already overdue, not least because of the degree of agreement among all noble Lords who have so far spoken about the urgency and seriousness of the issues facing the global economy. The situation has been described by Charlie Bean, deputy governor of the Bank of England, as a,

once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history.

There is agreement on the scale of the issue, but there may be less agreement on how we in this country are placed to withstand some of the storm after 11 years of this Governments much vaunted and so-called prudent economic boom. The Prime Minister continued to assert until quite recently that he had abolished bust and with it the need to set money aside for a rainy day. The result of this hubris is that the UK now has to face this global crisis with the largest fiscal deficit in the developed world, with the exception of Hungary, Egypt and Pakistan. Even before the scale of the global crisis hit us, we had reached in the first half of this year the highest level of public borrowing since 1946. We are entering a recessionwe have the Prime Ministers word for that. We face rising unemployment and continuing falls in the housing market. The last quarter has seen the sharpest fall in manufacturing

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confidence in 28 yearsa point touched on by the noble Lord, Lord Bilimoriaand inflation is at its highest for 16 years. This is a gloomy situation.

What confidence can we have in the Governments ability to get us through this? It is not as though there have been no warnings about the situation that we might face. One such warning came in 2005 from my noble friend Lord Griffiths of Fforestfach in a report for the Conservative Party, in which he stated that the scale of consumer debt made,

millions of households extremely vulnerable to shocks to the economy, both from fiscal mismanagement and external factors such as oil price rises, acts of terrorism and wars ... Credit is far too easily available in the UK.

He went on to say that banks market credit too aggressively. They also protect their own risks but not those of their customers.

That report was far from being the only concerned voice. From citizens advice bureaux and churches to economists and men and women in the streets, many were the voices that expressed concern about debt, both household and national. Then and subsequently, however, the only people who seemed not to be worried were the Government and the banks.

I have three questions for the Minister who will reply to the debate. First, as she will know, Conservatives have supported the recapitalisation of banks on the condition that regulation works efficiently and protects the taxpayer. It took, as we all know, the best part of a year for the Government and the FSA to admit that the regulation of Northern Rock had been faulty. The FSA recently had to apologise again, this time for its catastrophic failure to supervise the entire banking sector. How confident is the Minister that the Government and the FSA, which is their own creature, can provide an efficient regulatory system? How will the FSA achieve supervisory engagementits own wordswith the sector in the future and how will it prevent a repetition of its past ineptitudes?

Secondly, the taxpayer will soon own a majority stake in RBS/NatWest, a significant stake at the time of going to press in Lloyds TSB/HBOS and, of course, the whole of Northern Rock. Last month, Stephen Timms MP said:

I dont think it would be a good idea for the Government to start managing Northern Rock or other institutions that we have taken shares in.

Last Thursday, the noble Lord, Lord Davies of Oldham, who is in his place, said that,

the Government expect, particularly with regard to banks and the financial sector, an improvement in the relationship between performance and pay.[Official Report, 30/10/08; col. 1684.]

As we speak, the Government are rewriting repossession rules and saying what they expect from banks: moderate charges, transparent savings rates and so on. There is some ambiguity here, so will the Minister make it clear when she winds up just how much and in what ways the Government intend, or do not intend, to manage the banks? Given that a Times survey on 25 October reported that more than 40 per cent of people blame the Government for the financial crisis, and given the

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amount of taxpayers money at stake, there are issues of accountability here, and it would help the House if she were to address them.

Thirdly, there has been talk from Ministers in todays press of a return to Keynesian principles. We are being told that the Government will spend their way out of recession, but did not Keynes advocate spending in bad times the surpluses that Governments had built up in good times? We know that we have had good times, because the Government have told us so today. If that is so, where are the surpluses now? I hope that the Minister will be able to tell us.

5.15 pm

Lord Smith of Clifton: My Lords, there can be no doubting the seriousness of the current economic crisis that the UK faces along with many other nations. Other noble Lords have spoken, and will speak, on the causes of the crisis and how best it may be managed. Which thinker we should now turn to for guidance, whether Marx, Colbert or Keynes, is a matter that I shall leave to others, except to say that it is unlikely to be Milton Friedman.

Like the right reverend Prelate, I shall concentrate on the behaviour of the institutions that comprise the UK financial sector and those who have led them and contributed greatly to the present parlous situation. They bear great responsibility for what has happened and should be exposed and punished.

Since 1997, many noble Lords, including me, have regularly questioned the Government about their policies towards the excessive remuneration packages received by the directors of large companies. Most of those were out of all proportion to what was merited and were received by competent, mediocre and very poor performers alike. Numerous studies revealed a weak correlation between pay and performance. The reward packages were not just a symptom of what was going wrong, but one of the direct and immediate causes that brought about the maelstrom that has been visited on the UK economy. Widespread corporate and individual greed and the wholesale looting of investors money explain much of what has occurred.

The famous American sociologist Thorstein Veblen analysed the rapacious behaviour of the owner-managers of capitalist enterprises in the late 19th and early 20th centuries, referring to them as the,

red in tooth and claw,

robber barons with their displays of conspicuous consumption. Later, in the years of Butskellism, we were assured that, with the divorce of ownership and control, the consequential managerial revolution would produce a new breed of directors who would put the naked pursuit of profit maximisation in a more socially responsible context. They would recognise the legitimate claims of other stakeholders, including employees, neighbourhoods, the environment and wider society. It did not last long. Reaganomics and Thatcherism gave the all-clear to directors to emulate the robber barons of yesteryear, although this time they would do it with other peoples money. We shall await the assessment of a future breed of sociologists and historians as to how this occurred and was allowed to continue for so long.

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When questioned in this House about the overgenerous remuneration of company boards, the Government were complacent in their response and revealed almost no awareness of what was going on. Perhaps, in the words of the noble Lord, Lord Mandelson, they really did not care how filthy rich people became. Invariably, successive Ministers parroted that it was for company shareholders to deal with any excessive payments to directors. Belatedly, mild reforms requiring greater transparency were introduced, but it was all too little and too late. I stress that the Government were regularly alerted by noble Lords about the seriousness of the problem, but to no avail.

The Government now say that in return for bailing out the banks they will insist on more modest levels of executive pay and that the Financial Services Authority will monitor the situation and see that it is complied with. My honourable friend Dr Vince Cable, who alone among politicians predicted the coming of the present crisis, recently observed that the Royal Bank of Scotland had no intention of curtailing directors pay and bonuses and was making monkeys out of the Government as a consequence. It has been asked whether the motive behind Barclays Banks preference to pay over the odds for funds from the Gulf states is to avoid any government constraints on directors remuneration. The truth is that, whether or not they have accepted government money, the banks seem hell-bent on carrying on much as they did before. In the light of that, I ask the Minister in winding up to state precisely how the Government will prevent the banks from flouting their expressed policies.

Jeremy Warner, in his column in the Independentlast Friday, commented that in the United States corporate wrongdoing and excesses are subject to severe formal investigation and prosecution. The UK Government and regulators seem much less resolute in this respect, as the noble Lord, Lord Owen, speaking on Straight Talk over the weekend, reiterated. It really is not good enough. The guilty must be named, shamed and punished. The Serious Fraud Office should be closely scrutinising the activities of failed banks.

As the UK seems to be moving, regrettably but inexorably, towards becoming a totalitarian state, where vast sectors of industry and commerce are owned by the Government and the rest owned by French nationalised industries, and the whole of society is subject to total government surveillance, the future seems dismal. The growing gap between rich and poor may, in the circumstances of a collectivist state, give rise to a populist demand that other totalitarian methods be employed.

Perhaps I may be allowed a moment of whimsy. It could well be that Mr Arthur Scargill is asked to preside over a peoples tribunal to flush out, in short order, say, the 50,000 people most responsible for the present crisis among the banks, rating agencies, hedge funds, auditors, private equity companies and the like; after all, he has a nose for sniffing them out. In such an eventuality, I hope that he would be parsimonious in his use of military firing squads, although I accept that some examples may have to be made. The rest should be served with ASBOs, requiring them to be in the stocks every Saturday for three years, to be pilloried

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by the jobless and homeless, and on Sundays forced to help to deep cleanse our hospitals. Of course, such punishments would do little to restore the nations fortunes but, at a time of widespread gloom, they would add a little gaiety and would be immensely popular. To avoid such a scenario becoming reality, the Government must act to arraign those guilty of malfeasance.